Ethics Opinion 211
Fee Agreements; Mandatory Arbitration Clauses
A lawyer may not insist that a client enter into a fee agreement containing a clause mandating arbitration of fee and malpractice disputes unless the client is represented by other counsel.
- DR 2-106(A) (A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee)
- EC 2-19 (Desirability of written fee agreements)
- EC 2-23 (A lawyer should be zealous in his efforts to avoid controversies over fees with clients and should attempt to resolve amicably any differences on the subject)
- DR 6-102(A) (A lawyer shall not attempt to exonerate himself from or limit his liability to his client for his personal malpractice)
- 1.5(b) (Requirement of written fee disclosures)
- 1.8(a) (In transactions with clients, a lawyer shall make full written disclosure of relevant information and shall give the client a reasonable opportunity to seek independent legal advice)
- 1.8(g) (A lawyer shall not attempt to limit his liability to his client for his personal malpractice)
A law firm proposes to use a form retainer agreement which describes the legal representation to be provided and states that the law firm will use “its best efforts on behalf of the client’s interest.” The agreement requires the firm and its client to resort to arbitration for “[a]ll claims, disputes and other matters in question arising out of, or relating to, payment under this Contract for Legal Services, or the breach thereof. . . .” By its terms, the agreement requires arbitration of claims by the firm against its clients for unpaid fees and claims by the client against the firm for malpractice.
Fee disputes are to be arbitrated before the Fee Arbitration Board of the District of Columbia Bar, or if that is not available, before an arbitration panel mutually chosen by the parties. All other disputes are to be arbitrated in the District of Columbia under the rules of the American Arbitration Association. The agreement states that the client consents to the jurisdiction of the Superior Court of the District of Columbia for “all purposes in connection with arbitration” and agrees “to pay reasonable attorney’s fees in the amount of fifteen percent (15%) of the balance owed to the law firm..., plus all costs of said suit.” Finally, the contract erects a two-year statute of limitations within which arbitration must be started.
The law firm asks whether the mandatory arbitration provisions are proper under the District of Columbia Code of Professional Responsibility.
In our Opinion 103, we decided that written retainer agreements are highly desirable, and to that end we approved the use of a form agreement for legal services.1 However, we warned that form agreements “may not be adequate to set forth fully and fairly the terms of representation for all legal matters or for all attorney-client relationships,” and that great care must be taken to insure that form agreements comport with all relevant ethics requirements.
In our Opinion 190, we held that a lawyer was not prohibited from incorporating in a fee agreement a clause which mandated arbitration of all disputes between lawyer and client under the procedures of the American Arbitration Association or the District of Columbia Bar Fee Arbitration Board.2 However, we cautioned that a mandatory arbitration provision was not proper unless the lawyer made full disclosure to his client concerning any rights the client might waive by agreeing to arbitration and that the lawyer must not create arbitration procedures that violate DR 6-102(A).
Opinion 190 was issued prior to the promulgation of Rule 1.8 of the District of Columbia Rules of Professional Conduct, which is similar to rules in other jurisdictions that have been construed to bar mandatory arbitration provisions in retainer agreements unless the lawyer at least advises his client to seek independent legal counsel before entering into such an agreement. In addition, we note that Rule 1.5(b) of the new Rules of Professional Conduct will soon require lawyers to provide many clients with written statements concerning fee practices. Accordingly, we believe it appropriate to visit again the issues raised by mandatory arbitration clauses in written retainer agreements.
The State Bar of Michigan, in Opinion RI-2, which applies Rule 1.8(h)(1) of the Michigan Rules by analogy,3 has disapproved mandatory arbitration provisions in fee agreements unless the client has actually received independent counsel on the advisability of entering into the agreement. Opinion RI-2 notes that the lawyer and the client may have conflicting interests with respect to whether arbitration is appropriate and that, at the least, the client may not have the knowledge needed to make an informed decision about arbitration. The Philadelphia Bar Association’s Opinion 88-2, relying on Rule 1.8(a)4 of the Pennsylvania Rules of Professional Conduct, requires that a lawyer advise his client “in writing, in simple direct language, that by agreeing to arbitration the client is waiving the right to trial by jury . . . ,” and to seek independent legal counsel before executing the arbitration agreement.
Our Opinion 190 similarly cautioned that lawyers must “make a full disclosure to the client of all the ramifications of an agreement to arbitrate,” and we suggested that any agreement limiting the availability of punitive damages would be unethical under DR 6-102(A). However, over a dissent, this Committee rejected the need for independent counsel as required by Michigan and Philadelphia.
Our Court of Appeals has now promulgated Rule 1.8(a),5 which states:
A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) The client consents in writing thereto.
While a mandatory arbitration pro-vision does not precisely fit the language of the Rule 1.8(a), comment one to the Rule suggests that the Rule should be broadly construed to cover transactions in which the lawyer may have a conflicting interest with his client and has any advantage in dealing with the client.
As a general principle, all transactions between client and lawyer should be fair and reasonable to the client. In such transactions a review by independent counsel on behalf of the client is often advisable. Paragraph (a) does not, however, apply to standard commercial transactions. . . . In such transactions, the lawyer has no advantage in dealing with the client, and the restrictions in paragraph (a) are unnecessary and impracticable.
Our previous opinions concerning the lawyer-client fee relationship have similarly stressed the need for complete fair dealing by the lawyer with his client in the fee agreement. When a lawyer seeks to impose an atypical requirement in a fee agreement, for example, the lawyer must explicitly bring that provision to the attention of the client at the time the agreement is presented so that the client can intelligently consider the provision. See, e.g., Opinion 11 (interest on unpaid fees). Second, the lawyer owes the utmost duty of candor and fair dealing to the client with respect to fee matters. See, e.g., Opinion 185 (billing for disbursements). Our Opinion 190 also stressed the “obligation to make a full disclosure to the client of all the ramifications of an agreement to arbitrate.”
Our consideration of the arbitration provisions in instant agreement has lead us to the conclusion that Opinion 190 was incorrect in its belief that the complex nature of arbitration could be adequately disclosed to a lay client. The virtue of arbitration is its flexibility; arbitration procedures will typically be “atypical”. The salient characteristics of an arbitration which must be disclosed are therefore very difficult to catalog.
For example, is the arbitrator to be paid and, if so, must these fees be disclosed to the client? The instant agreement provides for both D.C. Bar and American Arbitration Association (“AAA”) arbitration, but does not disclose that the arbitrators must be paid. Since the fee for D.C. Bar arbitration is $25.00, perhaps it does not need to be disclosed. On the other hand, AAA fees can be substantial and surely would have to be disclosed. Similarly, what of matters of procedure? Neither the D.C. Bar nor the AAA Commercial Arbitration rules provide for discovery.6 Must this be disclosed? If so, how are the tactical considerations to be explained to a lay client? Arbitrations are typically not open to the public, while trials are. Must the client be told of this distinction; does it raise a tactical issue? In our Opinion 190, we stated that punitive damages are not available in arbitrations, but now we are told that there is a line of cases permitting arbitrators to award any type of damage a jury could award. If that is so, must the attorney advise the prospective client on the advantages and disadvantages of jury trial versus an arbitrator’s award for malpractice damages?
A second level of complexity arises with respect to the enforcement of the arbitral award. The instant agreement requires the client to consent in advance to the jurisdiction of the Superior Court of the District of Columbia. Is this fair to a client who resides in California and retains a District of Columbia attorney with a special federal expertise to handle a complex federal matter in, for example, (a) California, (b) Texas, or (c) North Carolina? Why should such a client be forced to bear the expense of travel to the District of Columbia to arbitrate even a simple fee dispute? On the other hand, can an uncounseled client realistically be expected to appreciate the issues raised by forum selection and is it practical for a lawyer in an initial meeting with the client to attempt to explain such a thing?
In summary, this Committee has come to the conclusion that it is unrealistic to expect lawyers to provide enough information about arbitration to a prospective client, particularly on a first visit, so that the client can make an informed consent to a mandatory arbitration provision. It is equally unrealistic to conclude that limited disclosure coupled with the advice to seek independent legal counsel will cure the problem. How many clients either will see or can afford to see a second lawyer as a condition of entering into an agreement with the first? Therefore, we now conclude that Opinion 190 was incorrect in supposing that adequate disclosures concerning mandatory arbitration could be made to lay clients.
Accordingly, mandatory arbitration agreements covering all disputes between lawyer and client are not permitted under either our prior Opinions or Rule 1.8(a) unless the client is in fact counseled by another attorney. We see no problem,7 on the other hand, with proposing mandatory arbitration where a client has actual counsel from another lawyer, who has no conflict of interest, upon whom the client can rely to assess the complexities posed by arbitration.
Even when mandatory arbitration is permitted, however, it is important to observe other restrictions on lawyer-client agreements in framing the procedures to be used. Where an arbitration agreement covers claims by the client for malpractice, the restrictions contained in DR 6-102(A) and Rule 1.8(g) of the District of Columbia Rules of Professional Conduct must be observed. In the instant case, for example, DR 6-102(A) makes unethical the lawyer’s attempt to reduce the limitations period for malpractice below that otherwise provided by law.8
Finally, we turn to that portion of the agreement which imposes on the client additional legal fees equal to 15 percent of fees owed in the event that the firm goes to arbitration and prevails. This provision must be considered under DR 2-106(A), which provides that “A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee.” Given the speed, efficiency and reduced costs or arbitration, the 15% charge may well be unrelated to any actual costs incurred by the firm and quite likely excessive. As we have stated in other opinions, “the firm must make certain that the percentage bears a reasonable relationship to the costs incurred.” Opinion 155.
Nothing in this Opinion should be read to discourage firms from seeking to avail themselves of the benefit of alternative dispute resolution techniques for resolving claims made by or against a firm. In the context of an actual dispute, rather than at the outset of the lawyer-client relationship, it may well be possible to recommend arbitration and to make all required disclosures in a fashion that permits intelligent consideration even by the lay client.
Dissent of Two Members From Opinion No. 211
In a series of recent decisions the United States Supreme Court has broadly endorsed arbitration as an alternative to traditional litigation as a means of resolving disputes in a wide range of circumstances.9 The Court’s decisions have applied not only to labor arbitration but to the broad range of commercial arbitrations subject to the United States Arbitration Act, 9 U.S.C. The District of Columbia Court of Appeals has given similarly broad reading to the District of Columbia’s enactment of the Uniform Arbitration Act.10
The majority, however, treats disputes between lawyers and their “lay clients” as inherently different from all other disputes, without ever explaining why and without any solid foundation in the applicable provisions of the Code or Rules. In other contexts arbitration agreements have been held enforceable without regard to whether each party fully understood its impact or the potential differences between arbitration and litigation. The AAA has a useful brochure describing the arbitration process. A Commercial Arbitration Guide for Business People. While it may well be difficult for a lawyer to effectively summarize all to the potential differences, it is quite possible to convey objectively the basic nature of arbitration. For example, a spokesperson for the AAA recently gave the following succinct summary:
Arbitration is hailed as a prompt and economical contractual method of resolving disputes without resort to the courts. Thus, when parties choose arbitration in preference to litigation, they must be conscious of the trade-offs found in arbitration but not found in litigation, such as (1) the privacy of the process, (2) the parties’ selection of their own decision maker, (3) the absence of a jury trial, (4) the absence of a judicial appeal on the law since arbitrators are not bound by principles of substantive law absent a contractual or statutory provision to the contrary, (5) the absence of broad discovery, (6) the relaxed application of the rules of evidence,(7) the payment of arbitration administration costs by the parties themselves instead of by taxpayers and (8) the absence of a written opinion with the award unless otherwise required [Page, Waiver of Right to Explanations, N.Y.L.J. April, 26, 1990].11
The majority relies principally on DR 5-104(A) of the Code and on Rule 1.8(a), but they were intended (in our view) to address transactions between a lawyer and client other than the agreement that creates the lawyer-client relationship upon which the application of those provisions is premised.
Consent-to-jurisdiction provisions are found in a variety of commercial contracts and are ordinarily enforceable unless shown to be unreasonable upon the facts and circumstances of the particular case. A provision that would presumptively be enforceable except in extreme circumstances ought not to be unethical just because the parties are lawyer and client.
Finally, the majority concludes that the provision for a cost of collection charge of 15% is subject to DR 2-106(A), prohibiting a lawyer from collecting a “clearly excessive fee.” That provision is aimed at the fee charged by a lawyer for legal services rendered to a client; it does not address the attorney’s cost of collecting a debt owed by the client. Such cost-of-collection provisions are common as to other parties, and are generally enforceable unless resulting in a disproportionate award, in which case the arbitrator, like a court, can limit the award to a reasonable fee. E.g., Central Fidelity Bank v. McLellan, 563 A.2d 358 (D.C. Ct. App. 1989) (agreed 25% fee for collection may be awarded if reasonable); F.W. Bolgiano & Co. v. Brown, 333 A.2d 674, 675 (D.C. Ct. App. 1975); (court should not impose 10% maximum on fee award in collection case). It is not self-evident that a charge of 15% of the balance owing will likely be unrelated to actual costs or will otherwise likely be excessive.12
1. The District of Columbia Rules of Professional Conduct also permit the use of form agreements:
. . . [A]n individual writing specific to the particular client and representation is generally not required. Unless there are unique aspects of the fee arrangement, the lawyer may utilize a standardized letter, memorandum or pamphlet explaining the lawyer’s fee practices, and indicating those practices applicable to the specific representation.
Comment 2 to Rule 1.5.
2. The value of fee arbitration is recognized in the District of Columbia Rules of Professional Conduct, which counsel attorneys to submit fee disputes to arbitration or mediation procedures established by the Bar when those procedures are invoked by a client. See Comment 15 to Rule 1.5.
3. Michigan Rule 1.8(h)(1) provides:
A lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement.
The equivalent District of Columbia Rule of Professional Conduct, Rule 1.8(g)(1), does not contain the italicized last clause, which was intentionally deleted by the Bar in proposing Rule 1.8(g)(1) to the Court of Appeals. Were our Rule 1.8(g)(1) applicable to arbitration provisions, which we hold it is not, then no agreement to arbitrate malpractice claims would be permissible in the District of Columbia.
4. Pennsylvania Rule 1.8(a) is identical to the District of Columbia Rule.
5. Rule 1.8(a) is a refocusing of the provisions of DR 5-104(A). DR 5-104(A) requires full disclosure by the lawyer to the client of possible conflicts arising from business transactions with the client and consent by the client after full disclosure.
6. The instant agreement made reference to AAA procedures without giving even a general description of those 6 procedures. We doubt that even most lawyers know what those procedures are.
7.We note that we do not have before us the case of an agreement limited to resolving fee disputes by arbitration before the D.C. Bar Fee Arbitration Board. The Board Rules have been designed to be inexpensive, quick, and fair to clients, and are publicly available. These are important characteristics that could lead to a different outcome.
8. he limitations period for malpractice in the District of Columbia is three years, D.C. Code § 12-301(8), see, e.g., Duggan v. Keto, 554 A.2d 1126 (D.C. App. 1989), whereas the proposed form agreement erects a two-year limitations period.
9. E.g., Rodriquez de Quijas v. Shearson/Am. Exp., Inc., 109 S. Ct. 1917, 1920 (1989); Shearson/Am. Exp., Inc., v. McMahon, 482 U.S. 220 (1987); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985). See also United Paper Workers v. Misco, Inc., 108 S. Ct. 364 (1987); AT&T Technologies, Inc. v. Communication Workers, 475 U.S. 643 (1986); W.R. Grace & Co. v. Rubber Workers, 461 U.S. 757 (1983).
10. E.g., Carter v. Cathedral Ave. Coop, Inc., 566 A.2d 716 (D.C. App. 1989).
11. The majority asserts that the arbitrators must be paid, but in AAA arbitration the arbitrators normally work without a fee.
12. For example, with a debt of $10,000 a 15% charge would be $1,500, or 15 hours at $100/hour, which scarcely seems excessive.